How to Create a Stablecoin: A Quick Guide
Currently, there are thousands of cryptocurrencies circulating the exchanges and blockchain platforms. However, they come with a high degree of uncontrollable volatility, making them unreliable payment methods.
This is where stablecoins come into play. Stablecoins are cryptocurrencies aiming to eliminate asset fluctuations. In other words, as its name indicates, it is a stable form of cryptocurrency. Keep reading to learn how to make a stablecoin.
What Is a Stablecoin?
A stablecoin is a digital coin, the value of which is tied to a specific asset. It emerges to incorporate the advantages of cryptocurrency with the low volatility of fiat money.
For example, investors can administer transactions on the blockchain without a monetary authority such as a central bank, allowing them to trade anonymously and securely. At the same time, a stablecoin is pegged to a particular stable or fiat asset, such as an international currency like the American dollar or a precious metal like gold. In this case, one stablecoin is equivalent to one U.S. Dollar because its value is pegged to the fiat asset. Thus, giving its holder the relative stability and predictability of its exchange rate.
As of today, there are more than 200 stablecoins on the market, with Tether (USDT) being the world’s first stablecoin. The coin was launched by Tether Limited and has the highest market capitalization of all its peers, reaching $69.4 billion as of November 2022. The second and third most popular stablecoins are USD coin (USDC), with a market cap of $42.9 billion, and Binance USD (BUSD), valued at $21.6 billion. That said, the total market cap of the top three stablecoins exceeds more than $133 billion.
What Are The Types of Stablecoin?
There are three types of stablecoins on the market: collateralized, non-collateralized, and hybrid. Let’s take a closer look at them.
Collateralized
Collateralized stablecoins are coins whose values are pegged to another stable asset in terms of exchange rate fluctuations. Depending on the choice of collateral, they fall under one of these categories:
- Fiat-Based Stablecoins: As the name indicates, fiat-based stablecoins are pegged to the value of an international fiat currency. Examples include Tether (USDT) and USD coin (USDC), which are tied to the U.S. Dollar value at a 1:1 ratio. For each stablecoin, a fiat currency is held in the treasury to back it up.
- Asset-Backed Stablecoins: Also known as commodity-collateralized stablecoins, these coins are backed by globally traded assets like precious metals (gold and silver), oil, and real estate. Examples include Tether Gold (XAUT) and Paxos Gold (PAXG). Each token is pegged to the price of one troy ounce of gold and is physically backed with the same quantity of gold bars. Additionally, investors can also receive the serial number of their physical gold bar to authenticate their assets.
- Crypto-Backed Stablecoins: Crypto-backed stablecoins are pegged to some other stable cryptocurrency like USD Coin (USDC), Pax Dollar (USDP), and Ethereum (ETH) as they are backed one-to-one by the U.S. Dollar. It uses decentralized finance (DeFi) protocol that removes third parties to ensure that the value remains stable with the backing token price. For example, Dai is a stablecoin cryptocurrency pegged to Ethereum (ETH) and the U.S. Dollar value.
Non-Collateralized
Non-collateralized stablecoins, also known as algorithmic stablecoins, don’t use any stable currency or asset for pegging. Instead, they are based on specific algorithms determining their value change derived from the dynamic correlation between demand and supply. The algorithmic formula based on demand-supply is also known as Seigniorage.
The algorithm is responsible for backing up these stablecoins. Like the central bank, it increases the supply during the deflationary periods and reduces it in the event of a decline in purchasing power of stablecoin. Examples of algorithmic stablecoins include G.V. and Polychain Capital.
Hybrid Stablecoins
Hybrid stablecoins are a combination of both collateralized and non-collateralized stablecoins. These coins are pegged to fiat and crypto tokens and algorithms. However, most laws put limitations on these projects.
A notable hybrid stablecoin includes FRAX. It introduces the concept of a cryptocurrency partially collateralized by the U.S Dollar. At the same time, it is stabilized using an algorithmic formula to maintain peg stability through supply and demand.
Risks Associated With Stablecoin
On May 7, 2022, the crypto market experienced one of its most significant crashes when the Luna crypto lost its value of $80 to a fraction of a cent in a month. Luna crashed because of its connection to Terra USD (UST), the algorithmic stablecoin of the Terra network. Nonetheless, UST was considered risky as it isn’t backed by cash or other assets. Instead, its stability was obtained from algorithms that linked the value to Luna. However, the algorithm failed to keep two tokens stable.
UST and Luna are sister coins on the Terra blockchain network that produced Luna tokens. The UST coin is an algorithmic stablecoin whose value is backed by Luna. In other words, while coins like the USDC and Tether are fiat-based collateralized stablecoins, the UST is a non-collateralized stablecoin backed by algorithms. This means that UST was not backed by the U.S. Dollar, precious metal, or another physical asset. Instead, UST was backed by an algorithm that updated the supply of the crypto based on the demand.
Around the midpoint of 2022, over $2 billion worth of UST was unstaked, meaning it was liquidated quickly. As a result, the vast selloffs caused the price of UST to fall from $1 to $0.91. Consequently, investors traded their USTs for Luna. As a result, this led to the increased minting and supply of Luna.
However, following this crash, crypto exchanges started to delist Luna and UST pairings, which caused Luna to also lose its value. The reason behind the incident is still up for debate, some stating that it was a response to the rising interest rate while others claim it was a malicious attack on the Terra blockchain.
How to Create a Stablecoin: 5 Easy Steps
The process of building a stablecoin can be complex. Nonetheless, each step will significantly impact the development process’s length and scope. That said, let’s dive into the steps to create a stablecoin.
Step 1: Identify the Type of Stablecoin to Be Developed
The first step in building a stablecoin is identifying the type of coin you want to develop. As we know by now, there are three types of stablecoins: collateralized, non-collateralized, and hybrid. To help you decide which option to choose, consider the following tips:
- Choose algorithmic stablecoins if you want long-term stability, as the prices may remain stable for an extended period.
- Choose collateralized stablecoins if you want to bring short-term stability, as they involve liquid assets that can be traded quickly.
Step 2: Choose Your Blockchain Platform
Once you have decided on the type of stablecoin you want to develop, the next step is to choose the blockchain platform to create your coin. Ethereum used to be the only platform for building stablecoins.
However, today, Stellar, EOS, and TRON blockchains have overtaken Ethereum due to their low transaction costs. For example, EOS stablecoin projects include Carbon (CUSD), EUSD, EOSDT, and Tether (USDT). In addition, Tether also runs on TRON and Ethereum besides EOS.
Other than low transaction costs, people are turning to Stellar, EOS, and TRON blockchains over Ethereum because these platforms offer:
- Greater interoperability to connect and communicate in a coordinated way without effort from the end user.
- High scalability to handle or expand in response to a massive volume of workload or increased demand for database access, processing, networking, or system resources.
- Higher transaction bandwidth, which is the maximum amount of data transmitted over an Internet connection in a given time.
Therefore, choose the right platform to launch your stablecoin based on the demand within the particular blockchain ecosystem. Nonetheless, The Ethereum platform also has a robust infrastructure. It has the most extensive ecosystem with high demand for custom currencies, ensuring relatively constant and sustainable liquidity flow for your stablecoin.
Step 3: Consider Liquidity Flow Maintenance
Once you select the blockchain of your choice, the next step requires considering the maintenance of liquidity by ensuring enough working capital is available. One of the most crucial bases of initial stablecoin development is ensuring the sustainable liquid flow for this stablecoin. If the liquidity is lost and there is no demand, your project of building a stablecoin might end up useless.
This step primarily deals with the blockchain platform and cryptocurrency you want to use as collateral. Therefore, to ensure the highest liquidity, consider monitoring and evaluating inflation. You may also need to watch out for your collateral’s daily currency rates and algorithmic protocols. For example, if you have backed your token with the U.S. Dollar or gold bars, you must monitor how the currency and asset are performing in the market to understand the value of your cryptocurrency.
Step 4: Create Visual and Technical Designs of The System
Designing a stablecoin requires understanding the flow of transactions and how the entire system will work. In this step, you may also need a system design, such as a website or a mobile application, to help your users interact with your token.
Step 5: Design, Test, and Launch Your Stablecoin
Once your designs are ready, the next step requires developing the system to launch your stablecoin. First, you must write smart contracts to interact with your coin and launch nodes on the blockchain platform.
Smart contracts are programs stored on a blockchain that are automatically executed when predetermined conditions are met. Their goal is to simplify transactions between parties without needing an intermediary. At the same time, nodes are network stakeholders that authorize and maintain a record of transactions.
Then, you need to launch your stablecoin on the testnet (test network) without risking real funds. For example, the Ethereum blockchain platform has three testnets: Ropsten, Kovan, and Rinkeby. After checking the quality of your developed product, fix any issues that might have arisen during the testing phase.
Once you have made the necessary adjustments and improved your stablecoin, you can launch it on the manner of your chosen blockchain. Then, consider listing your stablecoin on popular exchanges like Binance or Poloniex. For instance, Binance airdrops or gives away free cryptocurrency to multiple wallet addresses to raise awareness of a new token or coin. You could also consider listing them on crypto price-tracking web pages like CoinMarketCap and CoinGecko.
Sum Up
Unlike other types of cryptocurrencies that fluctuate; stablecoins are secured with a tangible asset like the U.S Dollar or gold. In other words, they are equivalent to cash. This characteristic makes stablecoins attractive for everyday transactions. For instance, stablecoins ease cross-border trade and eliminate customs fees, making investing and banking more accessible.
However, some financial experts fear stablecoins threaten existing payment systems and governments’ control over issuing currency. Nevertheless, stablecoins continue to grow in popularity because they are cost effective, fast, private, secure, and transparent.
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